Tax Practice and Procedure Chapter 9 Refund Claims & Litigation David M. Wooldridge Sirote & Permutt, P.C. 205.930.5219 dwooldridge@sirote.com © David M. Wooldridge 2007 1 Scope of Unit XII • • • • • • • Nature and requirement of claims Full payment rule Informal claims Variance doctrine Review of claims Statute of Limitations/TEFRA/Exam Refund Litigation © David M. Wooldridge 2007 2 Nature of Refund Claims • Refund claims are: – Substantive: informing IRS of request – Procedural: prerequisite to obtain a refund • § 6513: No refund authorized without claim – Jurisdictional: prerequisite to filing suit • § 7422: No suit unless claim filed • § 6532: No suit until six months after claim filed or claim disallowance © David M. Wooldridge 2007 3 Claim Requirement • Refund after S/L on claim runs = erroneous refund, §6514, and • Recoverable summarily §7405(a) – within 2 years of payment (4, if fraud) • Variance Doctrine limits recovery to grounds stated in claim (infra) © David M. Wooldridge 2007 4 “Overpayment” • Amounts paid > amount properly due • Lewis v. Reynolds – §6501 not a bar to proper computation • Equitable recoupment – generally defensive only – But see Bull case, text p. 242 – Payment of asserted deficiency, then claim for refund • Not amounts treated as “deposit” or “bond” – Rev. Proc. 2005-18; 2004 Act © David M. Wooldridge 2007 5 Full Payment (Flora) Rule • Flora v. U.S. • Absent statutory relief, all of tax for the period must be paid before jurisdiction lies for refund suit – Income tax: per TP, per year – FICA & §6672: per employee, per quarter – Any independently taxable item; “divisible taxes” © David M. Wooldridge 2007 6 Full Payment Rule • Availability of pre-assessment forum – Notice of Deficiency; Tax Court • Issue: Staying collection – if pay only for some periods – if don’t pay interest & penalties • e.g., 6672 refund actions – often voluntary withholding of action pending result © David M. Wooldridge 2007 7 Full Payment: Section 6166 • Jurisdiction over IRC § 6166 deferral issues – 1998 Act extended to Federal District Courts and Claims Court, even though payment of the estate tax has not been made in full – Issues such as qualification for deferral, but also valuation disputes, etc. • In addition to Tax Court declaratory judgments © David M. Wooldridge 2007 8 Form of Claim • Various Official Forms – Form 843 for generic claims – Forms 1040X, 1120X, etc. for specific taxes – “Refund” amounts on original returns • Most frequent case – Overpayments scheduled on Form 870 • Not Form 1139: Tentative Carryback Adjustment under § 6411 © David M. Wooldridge 2007 9 Informal Claims I • Use of forms not mandated by statute CONTENTS: • ID TP, period, desire for refund • Amount and type of tax • In detail, EACH GROUND upon which claim is based, and sufficient facts, to apprise IRS of the exact basis of the claim © David M. Wooldridge 2007 10 Informal Claims II • Example of Extent of Leniency: – Oral claim for a refund was sufficient as a claim (to confer court jurisdiction) when supplemented by a letter stating legal and factual basis of claim – Tinari v. U.S. (E.D. Pa. 10/28/98) © David M. Wooldridge 2007 11 Variance Doctrine • Court jurisdiction only grounds stated in claim – basis for refund that varies from bases in claim is PROHIBITED • Requirements may be waived by IRS – implicit if basis is litigated • Alternative (or inconsistent) claims are OK and common, EVEN ADVISED © David M. Wooldridge 2007 12 Variance: Ground vs. Theory • OK to assert two alternative legal theories of deductibility of a specific economic loss – Claim: “business bad debt loss” (no citation) – At trial: raised § 165 loss & § 166 bad debt as alternative theories of recovery • Court: not a new ground – claim contained enough info about merits for IRS to “reasonably deduce the existence of” the theory; alerted IRS of legal conclusion asserted © David M. Wooldridge 2007 13 Protective Claims • Claim forms are signed under penalties of perjury – true and correct, best of knowledge • Nevertheless, alternative positions and protective claims are appropriate, e.g., – E.g., year of deduction unclear; dispute affects other tax periods; contingent liabilities of estate not claimed on 706; etc. © David M. Wooldridge 2007 14 Review of Claims • Refund claims are treated as an “amended return” – may be granted upon recent and manual review – may trigger an exam of the “amended” return – Examinations of amended returns proceed generally on same procedures as examination of initial returns; Appeals review © David M. Wooldridge 2007 15 Notices of Claim Disallowance • IRS required to provide notice explaining why a claim is disallowed. § 6402(j) • Statute of limitations on refund suit commences upon mailing of Notice. § 6532 – Or, upon WAIVER. A trap for unwary. • May request prompt disallowance – To allow suit earlier © David M. Wooldridge 2007 16 TEFRA Procedures (RAA) • Request for Administrative Adjustment of a TEFRA partnership return – By any partner, not just TMP • IRS Options – Accept RAA, make adjustments summarily • Which requires partners to adjust consistently – Treat as non-partnership item – Conduct a TEFRA proceeding exam – Suit in all 3 courts allowed, if not allowed © David M. Wooldridge 2007 17 S/L on Refund Claims • No refund unless a timely claim is filed – Section 6511(b)(1) – Refund upon untimely claim = erroneous void • § 6514; recoverable in suit per § 7405 • § 6511 limits both – time of filing – amount of refund allowable © David M. Wooldridge 2007 18 No Extension by Agreement • Unlike the assessment S/L may not be extended by agreement • However, may be extended or suspended or mitigated for other reasons – Bad debts, loss carrybacks – Financial incapacity (infra) – Double inclusion, or disallowance of deduction • Can extend period to file suit afterward © David M. Wooldridge 2007 19 Suspension • Suspension – prior discussions • ADDITIONAL ITEM – Statute of limitations for filing claims is suspended while a TP is “financially disabled.” IRC § 6511(h)(2)(B). – Incapable of handling financial affairs – Power of attorney may negate disability – Added in 1998 Act © David M. Wooldridge 2007 20 Mitigation Relief Provided • § 1311 allows TP/IRS to correct an otherwise time-barred erroneous income tax treatment, in limited situations involving inconsistent treatment of tax items • § 1314 provides the mechanism: a 1-year reopening of the S/L for the aggrieved party to claim a refund (TP) or seek to assess a tax (IRS -- through NOD) © David M. Wooldridge 2007 21 Refund Raised in Collection • Collection Due Process provisions – 1998 additions, §§ 6320, 6330; Administrative appeal of liens & levies – Assertion of refund claim – If TP did not receive NOD, or – If TP did not otherwise have opportunity to contest the tax • Also, Offers in Compromise – on Liability © David M. Wooldridge 2007 22 Refund Actions in Court • No suit commenced before – 6 months elapsed since claim filed, or – claim disallowed • No suit commenced after – 2 yrs following Notice of Claim Disallowance – or, Waiver of Notice • Trap for unwary © David M. Wooldridge 2007 23 Available Forums • On an original claim for refund – – Court of Federal Claims • Original court of jurisdiction – Federal District Court • Forum Selection Criteria (prior material) © David M. Wooldridge 2007 24 Refunds in Tax Court • Tax Court has jurisdiction to determine overpayments, if year properly before it – Only years properly petitioned §6512(b) – i.e., IRS mails NOD, claiming deficiency, but Court determines overpayment instead – Amount limitation: amts paid after petition, plus amount recoverable if claim filed on date the NOD was mailed © David M. Wooldridge 2007 25 Rules of Procedure • FRCP in both • Court of Federal Claims – some special rules, covering unique differences – E.g., trial in multiple locations • Opposing Counsel – DOJ Tax Division Trial Section (Dist. Ct.) – DOJ Court of Federal Claims Section © David M. Wooldridge 2007 26 Settlement • • • • • • • Much More DIFFICULT in Refund Cases Absence of Appeals Office No culture of resolution Review procedures Involvement of Office of Review Joint Committee review Appellate Section handles appeals © David M. Wooldridge 2007 27